Washington Insider - Tuesday

US Risks from Steel Tariffs

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Renegotiation, Not Withdrawal Is NAFTA 2.0 Focus: Treasury's Mnuchin

The Trump administration's first priority in the NAFTA 2.0 talks is to renegotiate and update the pact, Treasury Secretary Steven Mnuchin told lawmakers last week, saying he was "cautiously hopeful" about that scenario as opposed to withdrawing from the trade pact as President Donald Trump has continued to talk about. "I don't want to go through the consequences [of withdrawal] because, again, that's not our first priority," Mnuchin told the House Ways & Means Committee. "Our priority is to renegotiate the deal, and, as I said, we are actively having discussions on this."

Rep. Darin LaHood (R-Ill.) asked Mnuchin if the administration had a plan in place to start negotiating bilateral trade deals rather than multilateral deals. "This is one of the top issues we're meeting on constantly," Mnuchin said. "The president's priority is bilateral, but I think he is open-minded. In Davos, he commented that if we could renegotiate the [Trans-Pacific Partnership], he would consider going into [a] multilateral [deal]." The talks are poised to pick up again in Mexico February 25, a day earlier than the initial schedule for the next round to start February 26.

Movement on USTR Nominees

Unanimous approval on the nominations of CJ Mahoney to be deputy US Trade Representative (USTR) for investment services, labor, environment, Africa, China and the Western Hemisphere, and Dennis Shea to be US ambassador to the WTO, was given Thursday by the Senate Finance Committee.

Mahoney and Shea now join Jeffrey Gerrish, nominated as another deputy USTR, and Gregg Doud as chief ag negotiator as nominees awaiting approval by the full Senate. It is not yet clear when that will happen. While USTR Robert Lighthizer welcomed the action on the nominations of Mahoney and Shea, he chided the chamber for taking so long to get to this point.

Washington Insider: US Risks from Steel Tariffs

Amid uncertainty in ag markets regarding the outcome of the NAFTA talks, Bloomberg is pointing to another concern for U.S. exporters. It says that the U.S. sounds confident that proposed tariffs on steel and aluminum won’t break global trade rules, despite warnings from other countries that are threatening to retaliate. Now the Commerce Dept is saying that “it is up to the president to decide if that’s a risk he’s willing to take.”

The Commerce Department on Friday laid out a range of options for President Trump to consider, including a tariff of at least 24% on steel imports from all countries. In announcing the long-awaited proposals, Commerce Secretary Wilbur Ross acknowledged other nations may respond in kind.

“We believe, and our counsel believe, that this is a perfectly valid interpretation of national security,” Ross told reporters on a conference call. “As to whether there will be a challenge, it wouldn’t surprise us if there were. Anytime you do something that affects a number of countries, the likelihood is that they will bring a WTO action or take other measures.”

China said the U.S. already has excessive protections on domestic iron and steel products and that it reserves the right to retaliate. “If the final decision impacts China’s interests, China will certainly take necessary measures to protect its own rights,” Wang Hejun, chief of the Trade Remedy and Investigation Bureau at China’s Ministry of Commerce, said in a statement on its website.

An official of Japan’s Kobe Steel Ltd. warned it would be difficult for the industry not to be impacted by such tariffs.

The question is whether the President is willing to court more trade conflict at a time when doubts are being raised about the longevity of the U.S. economic recovery. Assets such as stocks plunged this month as investors weighed whether the American economy may be overheating. The President has complained repeatedly about what he sees as the unfair trading practices of countries such as China. But he has also touted the American economy’s strong performance of late.

Some analysts are already predicting a backlash, Bloomberg says. Any of the options presented to Trump on steel would have a more significant and broader impact than expected, BMO Capital Markets analyst David Gagliano said,

American steel companies and steelworker unions have been pushing for Trump to follow through on his promise to protect the industry. Sen. Chuck Schumer, D-N.Y., said he hoped the recommendations “are the beginning of efforts by this administration to finally get tough on China.”

Sweeping tariffs may not solve the problem of excess capacity in China, the world’s biggest steel producer. The U.S. and European Union have complained for years that Chinese steel producers unfairly benefit from state subsidies, and dump their products on the world at below-market prices.

But China only accounts for about 1% of U.S. steel imports, Bloomberg says. Its steel exports overall shrank to the lowest in almost five years in January as strong domestic growth consumed most production and environmental curbs trim capacity.

“It’s a clumsy instrument for dealing with this problem, and it won’t change China’s behavior,” said Christine McDaniel, senior research fellow at Mercatus Center at George Mason University in Virginia. The U.S. imposed tariffs on steel early last decade, but wasn’t able to convince China to change its state-driven economic model, said McDaniel, who served as a senior trade economist in the White House Council of Economic Advisors.

“This is a pretty expansive use of national security which will inspire two things: one, retaliation, and two, it’s kind of a passport for other countries to emulate,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington.

In addition to tariffs of their own, countries such as China could challenge U.S. action at the World Trade Organization, a process that could take years.

The president last year ordered Commerce to probe whether imports of steel and aluminum imperil U.S. national security. In doing so, he invoked seldom-used Section 232 of the 1962 Trade Act, which allows the president to impose tariffs without congressional approval.

Trump has until April 11 to decide on any action on steel and April 19 for aluminum. He’s facing pressure from lawmakers in his own party, some of whom gave him an earful this week on the potential fallout. The president also risks alienating industries that either rely on steel and aluminum as inputs, or are worried about retaliation. A group called Farmers for Free Trade warned on Friday that US agricultural products such as chickens and sorghum could be first in the line of fire.

Canada is not only the top exporter of steel to the U.S. also is a large buyer, Adam Austen, the spokesman for Foreign Affairs Minister said. The Canadian government will continue stressing the importance of that trading relationship as it awaits the final outcome from Trump, said Austen.

So, we will see. The risks Secretary Ross talked about seem real, but so do the policy interventions that undercut global competition. Increasingly, the trade debate is one producers should watch very closely as it proceeds, Washington Inside believes

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